Changes to Canada's Integrity Regime for Public Procurement Create Onerous New Reporting Requirement
April 08, 2016
| Milos Barutciski, Matthew Kronby, Jessica Roberts and George Reid
On April 4, 2016, Public Works and Government Services Canada (Public Works), the procurement arm of the Canadian federal government, announced amendments to rules, known as the Integrity Regime, governing the eligibility of suppliers to enter into contracts and real property agreements with the Government of Canada. The Integrity Regime is intended to foster ethical business practices and reduce the risk of Canada entering into contracts with suppliers convicted of an offence linked to unethical business conduct. This update provides an overview of the Integrity Regime and highlights the recent changes.
Public Works, which administers the Integrity Regime, states that the new amendments are to clarify existing processes in response to feedback received from stakeholders in the procurement community.
However, as discussed in more detail below, the amendments do more than that; they impose an onerous new reporting requirement that when submitting a bid, suppliers provide a certified list of all foreign criminal charges and convictions with regard to the supplier, its affiliates and its subcontractors. The penalty for providing a false or misleading certification is automatic ineligibility to enter into procurement contracts (debarment) for ten years. Further, the definition of “affiliate” has been expanded in conjunction with new anti-avoidance rules aimed at capturing mergers, divestitures and other corporate reorganizations. Collectively, these changes are likely to create a significant new compliance burden, particularly for large, multinational companies.
Concerns with Previous Amendments to the Integrity Regime
The first iteration of the Integrity Regime was announced in July 2012, when Public Works regrouped its existing oversight measures into a formal Integrity Framework. The original Integrity Framework provided for automatic disqualification from public contracts if a company or any of its affiliates was convicted of a list of Canadian offences.
The Framework's listed offences were expanded in March 2014 to include foreign offences unrelated to Canada. The 2014 expansion proved highly controversial with the result that the rules were significantly overhauled in July 2015 and renamed the Integrity Regime (See our July 6, 2015, Update “Canadian Government Overhauls the Integrity Regime for Suppliers”). The April 4, 2016, amendments are the first from the new Liberal Government.
Overview of the Integrity Regime
Under the Integrity Regime, a supplier may be declared ineligible to bid on public procurements by virtue of a conviction of itself or of its “affiliate”. “Affiliate” has been defined broadly in the Integrity Regime through the concept of “control” taken from the Bank Act. Entities are “affiliated” if one directly or indirectly controls the other, or if a third party controls both. As described below, the April 2016 amendments expand the definition further.
Specified Offences and Similar Foreign Offences
Before 2012, the specified offences giving rise to ineligibility were initially limited to offences related to fraud on the government and breach of lobby and conflicts of interest laws. If a supplier or any of its affiliates were convicted of a listed offence, the supplier was ineligible to do business with the Government of Canada. Public Works subsequently expanded the list to include offences under the Corruption of Foreign Public Officials Act, the Competition Act and other federal laws.
The March 2014 amendments expanded the class of disqualifying offences by including “similar foreign offences” to the specified offences, while also establishing an automatic 10-year debarment period. This expansion had serious consequences for suppliers with foreign affiliates, because a supplier could be automatically debarred for ten years if a foreign affiliate was convicted of an offence in another jurisdiction that was “similar” to a specified Canadian offence. Public Works is the arbiter of whether a foreign offence is similar to a specified offence as well as the fairness and legitimacy of the proceedings that produced the foreign conviction.
The 2014 changes proved highly controversial, with the result that the rules were significantly overhauled in July 2015 to be more flexible, including by giving companies the opportunity to reduce their ineligibility from 10 years to 5 and to avoid ineligibility for the acts of foreign affiliates in which they were not involved. Since the July 2015 amendments, a supplier is ineligible on the basis of an affiliate's offence only if there is evidence that the supplier “directed, influenced, authorized, assented to, acquiesced in or participated in” its affiliate's misconduct.
However, in comparison with debarment regimes in other jurisdictions such as the United States and the European Union, the Integrity Regime affords the Government limited discretion to tailor ineligibility to the seriousness of the offence or the culpability of the supplier; it remains more oriented toward punishment and deterrence of misconduct, including conduct that may have little or nothing to do with government contracting, than with remediation or protecting the integrity of the federal procurement process. (See our July 6, 2015, Update.)
Administrative Process to Determine Ineligibility
One of the most important changes in the July 2015 amendments was the introduction of administrative processes, outside of a specific procurement process, to determine the ineligibility of a supplier under the Integrity Regime. This process can be triggered by the supplier through a request for a determination of its ineligibility, or by Public Works on its own initiative. The recent 2016 amendments clarify that a determination can also be triggered by a request from a government department, agency or other federal entity.
Under the Regime, a supplier is automatically ineligible if it has been convicted of or pleaded guilty to a listed Canadian offence. Where Public Works concludes that circumstances exist resulting in automatic ineligibility, Public Works will issue a Notice of Ineligibility, which is effective immediately.
On the other hand, if Public Works becomes aware of a conviction or guilty plea relating to a foreign offence of the supplier, or an offence (foreign or domestic) of the supplier's affiliate, or where a supplier has been charged with an offence, Public Works can issue a Notice of Intent to Declare Ineligible to that supplier. The recipient of a Notice of Intent may respond to Public Works in writing with an explanation as to why the recipient should not be declared ineligible under the Integrity Regime. Failure to respond to a Notice of Intent may result in a declaration of ineligibility or suspension of eligibility.
A Notice of Intent generally requires the recipient to engage a third party acceptable to Public Works to provide the requested information, rather than the supplier submitting information to Public Works directly. Public Works will require that the third party be independent and hold a recognized designation or accreditation, such as membership in a provincial or territorial Law Society, a Certified Professional Accountant (CPA) license, or public accounting license. Public Works also typically requires the third party to sign a certification form, certifying as to its independence from the supplier. The Minister has the sole discretion to determine whether a third party is sufficiently independent from the potential supplier to provide the services required and, as a matter of practice, Public Works will refuse to recognize a law firm or accounting firm that does unrelated commercial work for the supplier as being independent.
A Notice of Intent to Declare Ineligible puts the burden on the supplier (through its chosen third party) to establish that it is not ineligible under the Integrity Regime. For example, if an affiliate of the supplier has been convicted of a similar foreign offence, the supplier must show that it did not direct, influence, authorize, assent to, acquiesce in or participate in the improper conduct of its affiliate that led to the conviction. The supplier may submit any relevant information or documentation it wishes to establish that it should not be ineligible.
The process of responding to a Notice of Intent to Declare Ineligible is iterative – after a supplier has responded to the initial Notice and provided the requested explanation, Public Works has asked follow-up questions and may sometimes require further information from the third party before a final decision is made as to the supplier's ineligibility. The information required to make a determination will depend on the circumstances of the supplier and the particulars of the conviction.
April 2016 Amendments – Impact Assessment
The new amendments re-state and clarify many of the rules and processes put in place in July 2015. However, they also include changes that suppliers must be aware of in order to avoid potential inadvertent suspension or ineligibility. The most significant changes relate to a new requirement to inform the government of any relevant foreign criminal charges or convictions of the supplier, its affiliates and/or subcontractors, a severe penalty for providing false or misleading declarations or certifications to Public Works in relation to the policy, and new anti-avoidance provisions which broaden the application of the Regime.
Obligation to Inform Public Works of Charges / Convictions
Under the new April 2016 amendments, all bidders, offerors or suppliers must provide a complete a list of all foreign criminal charges and convictions pertaining to itself, its affiliates and its proposed first tier subcontractors that, to the best of the supplier's knowledge and belief, may be similar to one of the listed offences. In submitting a bid, a bidder, offeror or supplier certifies that it has provided a complete list.
Likewise, under the new amendments, a successful supplier must inform Public Works within ten business days if, during the performance of the contract, the supplier, any of its affiliates, or its first tier subcontractor is charged with or convicted of a relevant criminal offence or similar foreign offence. Failure to do so could result in ineligibility of the supplier, and termination of the contract for default.
Satisfying this new requirement could be an onerous task, particularly for larger companies or suppliers with numerous foreign affiliates. On the face of the new procedure, all bidders, offerors and suppliers are now required to be informed of criminal charges, as well as convictions, laid against their foreign affiliates for offences that are “similar” to listed Canadian offences. Suppliers should be aware of the fact that the Integrity Regime lists certain offences, such as false or misleading representation, which may not be considered as corruption offences in every foreign jurisdiction, and thus may go unreported under established corporate compliance and reporting regimes. Suppliers should ensure, when relying on foreign affiliates to report relevant charges and convictions, that those affiliates are aware of what the relevant listed offences are.
Automatic Determination of Ineligibility for False Declaration or Certification
The April 2016 policy amendments also include a harsh penalty for providing a false or misleading declaration or certification in relation to the Integrity Regime. If, in the opinion of Public Works, a supplier has provided a false or misleading certification or declaration, the supplier is automatically ineligible for ten years. It is not clear how this penalty will operate in practice, or to what extent inadvertence or mistake might be taken into account by Public Works in applying this penalty. For example, in submitting a bid, a supplier must certify that it has provided a complete list of all foreign criminal charges and convictions pertaining to itself, its affiliates and its subcontractors that, “to the best of its knowledge and belief” may be similar to one of the listed offences. However, in the event that a supplier certifies an inaccurate list, there is no procedure in the Regime for the supplier to demonstrate that it had no knowledge or reason to believe that the charge or conviction existed when the certification was made. On a strict reading of the Regime, ineligibility appears to be automatic if, in Public Works' opinion, the certification was false or misleading. No reduction of the ten-year ineligibility period is possible, for example through an Administrative Agreement. Suppliers must remain vigilant and take care to ensure that all certifications and declarations provided to Public Works are complete and accurate.
Anti-Avoidance Provisions and the Expansion of “Affiliate” and “Control”
The new anti-avoidance provisions are aimed at circumstances where, in the opinion of Public Works, a corporate succession either occurred for the purpose of avoiding ineligibility or suspension, or would result in the avoidance of ineligibility or suspension. As a related matter, the definition of “affiliate” has been expanded such that two persons are “affiliates” if both persons are under common control, or if each is controlled by a third party and the third party that controls one person is affiliated with the third party that controls the other person. Further, indicia of control now include “identity of interests (often found in members of the same family)” and “shared facilities and management or common use of employees”, among others. Suppliers should carefully consider whether they have any “affiliates” that may be captured by this expanded definition, particularly given the reporting requirements related to affiliate charges and convictions, and the harsh penalty for false reporting.
The new provisions do make the Integrity Regime easier to navigate in some respects, while clarifying certain ambiguities and adding procedural details. However the certification requirement with respect to affiliate charges and convictions, in conjunction with the severe penalty for false reporting, seems destined to create compliance nightmares for large multinational companies. Given the broad range of offences – both in Canada and abroad – that might be captured by the new provisions, and the obligation to include charges as well as convictions, this requirement will inject yet further compliance cost and uncertainty into the process for uncertain benefits from the standpoint of preserving integrity in government procurement as opposed to punishment. More generally, the amendments represent a missed opportunity: Public Works has eschewed any substantive changes to the Regime that could have addressed its overemphasis on punishment at the expense of remediation.